Russia’s economy needs a change of strategy

Jan 31, 2012

Felix Goryunov

Source: Drawing by Niyaz Karim

Russia’s position vis-à-vis China and the rest of the BRICS show that the decisions made two decades ago continue to plague the country and hold back its economic development. Can today’s politicians reverse the trend?

Although there is currently much speculation about the
performance of the world economy in 2012, one thing seems clear: Developed
capitalist countries will face economic contraction or sluggish growth while
the developing world will surge. According to the World Bank’s recent Global
Economic Prospects report, the eurozone may contract by 0.3 percent while the United States
will at best have a gain of 2.2 percent. The world economy as a whole will grow
this year by 2.5 percent, thanks to a predicted 5.4 percent expansion in the economies
of developing countries.

Just as happened three years ago, the world will be
rescued from economic collapse by the growth in emerging countries, first of
all by their leading group, the BRICS - Brazil,
Russia, India, China
and South Africa.
This phenomenon will prove true the International Monetary Fund’s prediction
that the emerging economies as a whole will by 2013 produce more than half of
global output measured at purchasing power parity (PPP). This epochal global
change is the consequence of two decades of economic expansion in four of the
BRICS member-countries.

Since 1992, China’s
GDP increased 5.3 times, India’s
rose by 3.5 times and Brazil’s
more than three. It is noteworthy that this growth went hand-in-hand with the structural
diversification of economies, renovation of their industrial base and
infrastructure as well as an expansion of purchasing power, social services and
public welfare.

But what about Russia? During the same time span, Russia suffered
an industrial and technological degradation that was more devastating than its
losses in World War II. As a result, Russia reached its 1990 GDP level
only in 2007 while the volume of industrial production remains less than in the
Soviet era. In terms of GDP estimated in PPP by the IMF, Russia is now number six in the world, while China is
second. In contrast to China
and the other BRICS members, which are steadily increasing industrial
production, the main drivers of the Russian economy continue to be domestic
consumption and exports of raw materials. Most Russian enterprises are not
expanding for a lack of fixed investment. (Although the extraction, metals and
defense industries are exceptions here).
The Russian government dreams of raising fixed investment to 25 percent
of GDP, whereas in China
its share is already 45 percent of GDP. The outflow of capital from Russia ($85
billion in 2011) is more than twice as big as direct foreign investment (about
$36 billion). Even a balanced budget, a current account surplus and sizable
hard currency reserves (about $500 billion at the end of 2011) can’t guarantee Russia’s
technological resurgence and higher competitive leverage.

The poorly diversified economy, addicted to imports of
high-tech goods and even some agricultural products, makes Russia fully
dependent on the whims of the world commodities markets. The country may face a
slump even this year if the world oil prices fall below $60 per barrel. A
repetition of the serious contraction of Russia’s GDP in 2009 ( -7.8%) after a
sharp decrease in oil prices is very likely, and last September, the World Bank
already projected a slowing of GDP growth in 2012 from 4.4 percent in 2011 to
around 3.5 percent.

Russia has another, rarely mentioned, vulnerability. At the
peak of the 2009 slump, business daily Vedomosti observed that the crisis laid
bare the fact that the Russian economy is controlled not by the government but
by a few oligarchs who monopolized profitable industries and influence state
economic policies. The newspaper’s point was confirmed when the oligarchs’
foreign liabilities were bailed out by Prime Minister Putin‘s government at a
cost of more than 3 trillion rubles to the federal budget. This happened at the
time when Russian small-and medium-sized businesses badly needed funds to
survive the crisis and the country’s problems with outdated infrastructure were
becoming acute.

Vedomosti also disclosed that the oligarchs hold their
companies’ assets in offshore firms and keep even their operating capital in
Western banks to evade taxation at home. These huge capital outlays are not
only lost to the domestic economy. As a matter of fact, the multi-trillion dollar
assets of domestic enterprises are no longer subject to Russian jurisdiction.

If versatile and sustainable economic development and
its relevant strategies are the main yardsticks for assessing the global
position of emerging nations, Russia
actually doesn’t belong with them. Its current position as an economic lame duck
among the BRICS is a direct consequence of the decision made two decades ago,
when the Russian economy moved from socialism with an ugly face to capitalism
with a distorted one. This distortion prevented it from building a
market-oriented economy and European-type welfare system.

These neoliberal strategies that the Russian economy
continues to follow were borrowed by then-President Boris Yeltsin’s team of
reformers from the United
States. Today, many progressive Western
economists recognize the problems with this neoliberal ideology and point to the
phenomenal successes of China,
whose ruling elite adopted a national development strategy that converged state
planning and industrial policies with market guidance and encouragement of
enterprise. This makes it more obvious that Russia’s decision to proclaim the
supremacy of market forces in economic development was critically wrong.

The recent street protests that have rocked Russia are not
only about vote rigging in parliamentary elections. They are also crucially
about the regime’s failure to ensure robust economic and social development,
minimize income inequality, curb corruption, and encourage individual
enterprise. In the age of the Internet and cheap foreign travel, Russians see
that even formerly backward countries have devised efficient strategies of
economic growth and social improvements. The recent debates between Russia’s presidential
candidates reveal that a radical change of economic and social strategy is an
important point for discussion among the political elite. But we will only know
after March 4 if any actual reforms will be forthcoming.

Felix Goryunov is a Moscow-based
economic journalist who has been covering international economic and trade issues
for more than 30 years.